You don’t need hundreds of thousands of dollars to invest in property. Through the share market, you can own a slice of shopping centres, office towers and warehouses. Here’s how REITs work.
A real estate investment trust, or REIT, is a company or trust that owns income-producing property, such as shopping centres, office buildings, warehouses, hotels or apartments.
In Australia, they’re often called A-REITs, and they’re among the largest companies on the ASX. Well-known examples include Goodman Group, which owns and develops logistics warehouses, Scentre Group, which owns Westfield shopping centres in Australia and New Zealand, and Stockland, which develops housing and owns retail and industrial property.
How they work
Investors buy units in a REIT on the share market, just like buying shares. Each unit represents a small slice of the trust’s property portfolio.
The REIT collects rent from tenants, pays its costs, and passes most of its income on to investors as distributions, usually twice a year or quarterly. Because of their trust structure, REITs generally don’t pay tax on income they distribute; investors pay tax on it instead.
That makes REITs popular with investors looking for regular income.
Types of REITs
REITs often specialise. Retail REITs own shopping centres. Office REITs own office towers. Industrial REITs own warehouses and logistics centres, a sector that has boomed with the growth of online shopping and data centres. Others focus on healthcare, childcare centres, hotels, farmland or homes.
Diversified REITs own a mix of property types.
Benefits
REITs let investors own a share of large commercial properties that would otherwise be out of reach, for a small amount of money.
They’re also easy to buy and sell, unlike a house, which can take months to sell and involves large transaction costs such as stamp duty.
Exchange-traded funds that hold a basket of REITs offer even broader exposure.
Risks
Because REITs trade on the share market, their prices move every day and can be volatile, sometimes falling sharply in a sell-off even when the value of their properties hasn’t changed much.
They’re particularly sensitive to interest rates. Higher rates increase their borrowing costs and make their income less attractive compared with term deposits and bonds, which tends to push their prices down.
Each sector carries its own risks. Office REITs, for example, have been hit by the shift to working from home, which reduced demand for office space in some cities.
Many REITs also use debt to buy property, which can magnify both gains and losses.
